Janernoa & Ghosh: The country must learn fiscal lesson from Detroit

Oct. 5, 2013

Written by

Mike Jandernoa and Pratik Ghosh

Detroit Free Press guest writers

Pratik Ghosh

Mike Jandernoa

More

ADVERTISEMENT

It is no secret that over-promising more than you can afford is a recipe for disaster. No household can maintain that arrangement. No business, large or small, can survive it. Now, Detroit, America’s 18th largest municipal government, must also face its day of reckoning. Why, then, does the federal government feel it is exempt from this commonsense principle? How can voters across the country learn from Detroit’s crisis?

The answer lies in our leaders’ willful ignorance of the true extent of our fiscal problems. As it stands, the official national debt is just shy of $17 trillion. Yet, the real magnitude of our debt and unfunded obligations, according to a report by a nonpartisan and millennial-led organization called The Can Kicks Back, totals $200 trillion.

That $200-trillion figure is an estimate of the of the U.S. fiscal gap, which is the present value of all future expenditures, including the costs of servicing the interest on the official debt, minus total projected government revenue. The measure takes into account the obligation of entitlement programs such as Medicare and Social Security that current government accounting conveniently leaves off its balance sheets. In effect, the fiscal gap is the difference between what our government has promised and what it currently is able to pay.

Before any issue can be solved, it is crucial to know and understand the full extent of the problem. Detroit’s story, while undoubtedly complicated by a range of factors, is one of underreporting: it invested too little as a result of discounting or outright ignoring its future obligations. If our nation’s leaders are to learn one lesson from Detroit’s bankruptcy, let it be that we must account for our full obligations to avoid a similar demise.

A bipartisan duo of leaders in both the House and Senate recently introduced a bill titled the INFORM Act (Intergenerational Financial Obligations Reform Act), which would require the Congressional Budget Office, Government Accountability Office and Office of Management and Budget to use fiscal gap analysis in their annual reports and their individual evaluations of any major proposed changes to fiscal policy.

(Page 2 of 2)

Once we begin to consider the entire economic extent of our debt and future obligations, the fiscal gap will have to be closed in order to achieve sustainability. The INFORM Act also compels the incorporation of generational accounting –– an analysis that reports the lifetime net taxes (taxes paid, less benefits received) for each age cohort. The same report indicated that, under today’s policies and assuming the fiscal gap was left to future generations alone to close, a senior turning 65 this year would receive $327,500 more in benefits than he has paid in taxes, while a future American would pay $420,600 more in taxes than he will have collected in benefits. This is an outcome that is both financially and morally bankrupt. We must change course.

In Detroit, those who stand to suffer the most from the city’s insolvency are current retirees or those soon scheduled to collect pensions. It is becoming all the more clear that such is not the case for the rest of the nation. When the bill comes due on treating America’s dreadful fiscal health, it will inevitably land on the laps of young people –– who had the smallest role in creating the problem in the first place. And the longer we wait to take action, the greater the burden future generations will inherit.